Wednesday, February 22, 2006

Online panel at FT.com answer questions from TechBoard on Google

A distinguished panel of analysts and journalists take questions from Philip Letts of TechBoard today about Google's future and value, live at FT.com.

The web panel and online Q&A is well worth tuning in to. (Go to www.ft.com and click on top banner on home page.)

We also quote from one of Philip Letts key questions and the response from the panel:

"Google’s growth needs to be augmented by new revenue streams to justify their lofty valuations. Offerings such as Google Base, Google Video and Google software (Pack etc) hold promise but deliver little to the top line today. And there are endless rumours of Google Music, payments etc etc.What new revenue streams/offerings does the panel think will help Google meaningfully diversify their revenues in the mid term and what should that do for their stock price?"Philip L Letts, TechBoard

Cody Willard: Google Wallet is likely to come out soon, and the implications of such a rollout are big. If Google is to maintain critical mass in search - and continue to grow its reach - adding a Google wallet will help Google become a (and perhaps THE) de facto means of distribution, including paid-for distribution, which will be key in the non-piracy world of online downloading. Google currency? Apropos my earlier year end target for Google, I wonder who will be on their $500 bill?

Jeff Matthews: Good question.

The biggest risk to Google’s existing revenue base may be dilution from its own success in search. More keyword bidders are driving up the cost of keywords to uneconomic levels - at least that’s what has happened at two large search marketing users, FTD Group and Blue Nile.

Google Mail, Google Maps and Google Base only exist to drive more search, which runs the risk of further diluting the search model. As I write this e-mail in Google Mail, ads are popping up alongside this email. There is such as thing as too many search ads chasing not enough clickers. Consequently, as you point out, I doubt Google Base or Maps or Mail adds much to Google’s search revenue.

As for Google branching into the pay-per-download revenue model via Google Video, the speed with which mainstream media is adopting a video download model (after watching the music industry fight the trend unsuccessfully) probably renders Google too late to benefit in a significant way from an Apple-style video download business.

Thus, like most great new technology innovators that break through with a new technology only to find it impossible to diversify into new businesses, I suspect the next big revenue stream for Google will be adopting its search model to a “click-to-call” model in which consumers can click a button or an icon and be connected with the company or service provider. The value of a live customer on a phone is far higher than a person who simply clicks on a web-based ad.

Stephen Schurr: One of the great conundrums in analysing Google’s prospects is understanding which of the 100 or so major initiatives the company is working on will have a meaningful impact on the bottom line.

My guess is that over the short term, the new revenue streams that will boost Google’s bottom line are ones that are very similar to what it does today: for instance, Google’s push into mobile searches. Mobile search just takes Google’s successful model and puts it in a new venue. The question remains whether mobile search ads truly represent a diversified revenue stream in the event of a recession that causes a slowdown in advertising.

Comparisons to Microsoft may seem facile, but I think Google does face similar challenges in successfully diversifying away from its core product.

I have some concerns regarding other new initiatives. Google Video is a case in point. While the company has been explicit in saying the video product is still in beta mode, I must admit Google Video comes off as pretty amateurish. I have no doubt that the company will improve the service – and the 70/30 profit sharing arrangement with content providers could be quite lucrative for Google. However, it is a highly competitive landscape and Google doesn’t appear to have quite as many advantages over its competitors when it comes to content. (For more on that point, you can check out these interesting comments: http://blog.searchenginewatch.com/blog/060106-142226).

Broadly speaking, my biggest worry with the new initiatives is that Google will never be able to replicate the high-margin, high-growth miracle that online search advertising has been for the company. That’s natural, but I don’t think the stock price reflects this. The moves to diversify are the right moves to make sure Google is positioned for long-term growth. However, I doubt they will happen upon a second golden calf; and if the first golden calf slows substantially, Google’s growth prospects will be diminished.